EXERCISES
EXERCISE 1
Suppose that the conditions of CAPM are fully respected. The market portfolio expected
return is 5% and the risk-free rate is 1%. We create a portfolio in which 30% of the
wealth is placed on security A, whose beta is equal to that of the market, 50% on
security B, whose beta is twice that of the market, and the remaining 20% is invested
in the risk-free asset. What is the expected return of the portfolio?
EXERCISE 2
The market portfolio has an expected return of 5%, and the risk-free rate is 1%.
Suppose that the conditions for CAPM are fully respected. The expected return of a
portfolio in which 40% of the wealth is placed in stock A and 60% in an ETF that
perfectly replicates the market portfolio is 7%. What is the beta of stock A?
EXERCISE 3
In a perfect capital market, a company has outstanding shares worth 100 million euro,
and has 40 million euro of debt. The annual cost of equity is 8%, while the annual cost
of debt is 5%. What would be the cost of equity if the company had no debt?
EXERCISE 4
Consider the following series of unadjusted monthly closing prices (in euro) of a stock
that undergoes the corporate events indicated next to the price.
January: 7
February: 6.5 Dividend of 1 euro per share is paid
March: 7.5
April: 7.2
May: 4 2 for 1 stock split
June: 4.5
Compute the adjusted stock returns.
EXERCISE 5
In order to implement a straddle strategy you buy for 2 euro a call stock option and for
2 euro a put stock option, both with a 20 euro strike price. At the expiration date the
price of the stock on the market is 25 euro. What is the net profit that you earn from the
entire operation?